Homework answers / question archive / You have just completed your undergraduate degree, and one of your favorite courses was "Is Entrepreneurship for You

You have just completed your undergraduate degree, and one of your favorite courses was "Is Entrepreneurship for You

Finance

Share With

You have just completed your undergraduate degree, and one of your favorite courses was "Is Entrepreneurship for You." You enjoyed it so much you have decided you want to start your own business. While you were in the program, your grandmother died and left you $325,000 with no restrictions. You are not an inventor, and you do not have a trade skill that you can market; however, you have decided that you would like to purchase at least one established fast-food franchise, maybe two (if profitable). The problem is that you have never been one to stay with any project for too long, so you figure that your time frame is four years. After four years, you will sell off your investment and go on to something else. You have narrowed your selection down to two choices:

(1) Franchise 1: Chicken Express and

(2) Franchise 2: Healthy Comfort Food.

The net cash flows shown below include the price you would receive for selling the franchise in Year 4 and the forecast of how each franchise will do over the four years. Franchise 1's cash flows will start high but will trail off as other competitors enter the marketplace and as people become more health-conscious and avoid fried foods. In contrast, Franchise 2's cash flows will start slowly but will increase rather quickly as people become health-conscious. Franchise 2 serves breakfast and lunch, while Franchise 1 serves only dinner, so it is possible for you to invest in both franchises (i.e., projects may or may not be independent). You see these franchises as perfect complements to one another: you could attract both the lunch and dinner crowds and the health-conscious and not so health-conscious crowds without the franchises' directly competing against one another. Here are the net cash flows (in thousands of dollars):

Expected Net Cash Flows

Year Franchise 1 Franchise 2

0 -100 -100

1 95 8

2 75   45

3 45 55

4 20 85

Depreciation, salvage values, net working capital requirements, and tax effects are all included in these cash flows.

You also have made subjective risk assessments of each franchise and concluded that both franchises have risk characteristics that require a return of 8 percent. You need to select one or both projects for your investment.

1. Create a time line for each of the franchises.